Steven, given the very negative effect of having hired Equiti-trend and their lack of engagement with, it seems, the company itself and most obviously with shareholders, I think the announcement today was very good insofar as it signals an important change for the better: more visibility and attention to shareholders. (Although where's the announcement stating that Hawk has been re-enlisted as the company's IR firm?)
As for the content of the announcement, I think the most positive thing to come away with is that it proves they are taking strategic steps to enhance one of their products and, perhaps, open themselves up to a new market stream. But beyond these simple generalizations, it's difficulat at best but primarily impossible to tell whether or not the agreement is a smart one. It has the earmarks in my opinion of being a smart move--here I'm not contesting Pappy's points; rather, I'm just saying that given that the company is focusing it's attention on the cigs, this move strikes me as potentially enhancing this segment of their business.
It seems the one definite practical conclusion to draw from the announcement is that since CKGT said they themselves have produced samples of this new cigarette paper, CKGT's new facility has the capacity to adopt the technology that they evidently are buying from the new associate, that is, Shandong Yishui Ruibosi Tobacco Ltd. (Ruibosi). Presumably, then, the cost of this agreement will amount to a small percentage of sales as royalties. Yet whatever it is it doesn't seem like there will be any way to assess it's value to the company until the newly minted cigs hit the market, which apparently won't show up until Q3 2011. (Will the manufacturer who currently produces CKGT's cigs be able to incorporate the new cig paper change sooner?)
As for what is not clear, I thought this segement of the announcement was particularly vague:
"... the company (CKGT) has introduced a paper process technology that is broadly used internationally. The process produces a reconstituted tobacco sheet that is mixed with cactus and Chinese herbal medicine.
"The Sheng Cao cigarette (i.e., CKGT's) ingredients include tobacco, cactus, honeysuckle, ginkgo and tea leaves producing a high quality cactus-based cigarette with a very special flavor. The process not only improves the taste, it also reduces the amount of nicotine, tar and carbon monoxide in the final product. With a strong supply of cactus reconstituted tobacco, the company has the capacity to produce cigarettes in its own plant in Macau as well as sell its ingredients to other tobacco companies."
In the first paragraph it says that it is using a process that is "broadly used internationally." But then it says that that very process involves cactus and herbal medicine. Presumably what they meant is that they are going to use some internationally recognized technology for making cigarette paper and substitute their cactus extracts and herbal medicine for what the industry normally uses. But this is not what they actually said.
The second paragraph is a mess. They had been talking about the new technology for making cigarette paper. Now they jump into stating that their brand of cigs uses XYZ ingredients. They then follow this up immediately with a sentence that seems to revert back to the new technology they're buying and state that "The process not only improves the taste, it also reduces the amount of nicotine, tar and carbon monoxide in the final product." This implies that the new cigarette paper itself accomplishes this--the better flavor makes sense but not the reduction of nicotine etc. The next sentence is again confusing. For it seems to state the obvious: CKGT can make cigarettes from their own cigarette manufacurting plant. Duh, you don't say! Then they add that they have enough reconstituted tobacco to sell to other manufacturers. So what is this supposed to mean? Have they completely abandoned the theme of the announcement, namely, the new technology agreement they've enter for making cigarette paper and instead are here just stating that they'd be willing to sell their raw materials to other cig companies who might want to start manufacturing CKGT's brand of cigs? Or are they suggesting that all those other manufacturers who currently use this "paper process technology that is broadly used internationally" might be inclined to start substituting CKGT's cactus and herbal medicine in the production of their cigarette paper? I doubt it is this latter possibility because already existing name-brand cigs are not likely to want to start using different ingredients in their cigarette paper because that will, necessarily, change the taste of their well established brands. So it seems like a confused paragraph aimed at saying that once they incorporate this new paper technology into their manufacturing of their own cigs, more manufactures are apt to be inclined to produce them and CKGT will have enough raw reconstituted tobacco to sell to them if they should desire to do so.
Then again, in the paragraph that immediately follows the two cited above, it states that the company they've just entered into agreement with is a subsidairy of:
"... one of the four tobacco manufacturers designated by the State Tobacco Monopoly Bureau to develop reconstituted tobacco using the paper process technology."
So maybe they are suggesting that other produces of name-brand cigs will start adopting this paper process technology and this in turn could provide CKGT with a different revenue stream. It doesn't make much sense to me. For if the technology is already "widely used," then it obviously doesn't need to use CKGT's cactus and herbal medicine. Hence, those manufacturers who haven't yet adopted this new technology could do so without in anyway needing to purchase raw materials from CKGT.
As for your other question about the put option, I would think you'd be wanting to log in a questions to Amy at Hawk since it could prove to be a significant vote of confidence on management's part that they won't have to access that capital. Especially if the deadline is so close at hand. If you do write her, would you please also ask her if they intend to make a public announcement about being rehired by CKGT?
Thanks, Steve
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